Personal Finance For Motivated Savers, Cutting Costs Is Painless

February 20, 1989|By CLINT WILLIS, Money magazine

What you do with your hard-earned money isn`t anybody`s business but your own. But while you may choose to keep your spending habits private, you should render an accurate account to at least one person -- yourself.

That account, known as a cash-flow statement, is a review of your income and expenses. It will help you identify financial problems of which you may be only vaguely aware. A cash-flow statement, for example, can tell you whether, with the help of credit, you are spending more than you are taking in. Or it may reveal that you are spending more money in certain categories than you thought. For families who decide to redirect their spending, the cash-flow statement is the starting point for a budget.

Setting up your statement requires a bit of detective work, which is easiest at this time of year, while you already are sorting through your tax records. (The accompanying worksheet will help.)

Begin by calculating last year`s total income. Next, estimate last year`s expenditures in each of the spending categories -- taxes, housing and so on. Your checkbook and credit-card bills will provide most of the information you need: If you don`t keep charge-card statements, most creditors will provide free copies.

With routine expenditures, you can double six months of data to get annual sums.

For seasonal outlays, such as Christmas presents and vacations, you may have to dig further for receipts.

Cash purchases are hardest to track. For a rough idea, keep a tally of cash expenditures in each category for a month and multiply by 12.

The accompanying worksheet will enable you to compare your rates of saving and spending with those of other households. Bear in mind that average savings rates seldom conform to the ones financial planners advise.

Finally, add the category totals to arrive at your total annual spending. That number should equal 100 percent of your income. If it is larger, you may have trouble, even if your cash-flow statement shows that you have stashed cash in savings and investment accounts. Reason: You either have increased your debt or dipped into savings to make outlays.

If your savings rate suggests that only minor spending cutbacks are in order, you don`t necessarily have to skimp in categories that give you satisfaction. Here are a few painless and often overlooked ways to cut costs:

-- REFINANCE AN EXPENSIVE MORTGAGE: If you pay a fixed rate of 12.5 percent on a $60,000 loan, a new 10.5 percent mortgage will cut your monthly payments by about $70. That money will pay off closing fees and other refinancing costs within two years or so; after that it can go into savings.

-- STREAMLINE YOUR INSURANCE: You can easily trim $200 or more from a $1,000 auto insurance premium by increasing the collision deductible from $100 to $500. If your disability policy promises to begin paying benefits 30 days after you are disabled, a 90-day waiting period might cut a $1,386 premium by $516.

Think about replacing any term life insurance policy if it is more than 5 years old. New policies are cheaper, in part because they reflect updated mortality tables. On a $250,000 term policy, you can save $250 or more. Likewise, older couples may reduce the amount of their life insurance coverage if they have accumulated sizable nest eggs and have cleared such major hurdles as putting their children through college.

-- PAY LESS IN PROFESSIONAL FEES: For routine tax preparation and legal work, turn to reputable storefront chains. For instance, Hyatt Legal Services, a nationwide firm, charges an average of $75 to prepare a simple will, compared with $200 or more at most traditional law firms.

You may find that to boost your savings rate to a reasonable level you must create a budget that assigns a set percentage of monthly income to savings and various household expenses. Don`t be draconian; establish limits that you and your family can live with.

Keep credit-card and other receipts, and maintain a log of all expenditures until you are sure that your budget is on track. Then monitor expenses on an annual basis. If you spend less on child care as your children grow older, reroute cash to where it`s needed most.

``Budgeting is about as much fun as reading the telephone book,`` says Harold Gourgues, an Atlanta consultant to financial planners. Maybe. But as your bank balance mounts, you will find that it`s a lot more lucrative.